DealLawyers.com Blog

The Delaware Supreme Court doesn’t appear to be seeing eye-to-eye with the Chancery Court when it comes to disclosure of advisor conflicts.  In March, the Court overruled the Chancery Court and held that allegations of undisclosed conflicts of interest involving a special committee’s legal and financial advisors were sufficient to deny the defendants’ motion to dismiss breach of fiduciary duty claims.  Last week, it was “deja vu all over again,” because the Court did the exact same thing in City of Sarasota Firefighters Pension Fund v. Inovalon Holdings, (Del. Ch.; 4/24).

The case arose out of the sale of Inovalon Holdings to a private equity consortium led by Nordic Capital, a Swedish private equity firm.  In a bench ruling, the Chancery Court rejected the plaintiffs’ fiduciary duty claims and concluded that the transaction satisfied the MFW standard and was entitled to deference under the business judgment rule.  On appeal, the plaintiffs contended that the transaction didn’t meet MFW’s “ab initio” test because of substantive negotiations engaged in by the founder before a special committee was formed, and because conflicts of interest involving two of the special committee’s financial advisors were inadequately disclosed, the stockholder vote approving the deal was not fully informed.

The Supreme Court reversed the Chancery’s decision based on the disclosure claims and did not address the alleged violation the ab initio requirement. This excerpt from Debevoise’s memo on the case explains the Court’s reasoning:

The Court found that the Inovalon proxy statement failed to adequately disclose conflicts of both financial advisors. It found that language stating that the second advisor “may provide” services to Nordic and its co-investors was misleading given that the advisor was in fact providing such services, creating a concurrent conflict. In the case of the first advisor, the Court held that disclosure that the bank would receive “customary compensation” in connection with disclosed concurrent representations was insufficient because it kept stockholders from “contextualizing and evaluating” the conflicts. It also found that the proxy statement failed to disclose the first advisor’s fees for prior work for members of Nordic’s equity consortium, which amounted to nearly $400 million in the relevant two-year period.

The Court stated that while “there is no hard and fast rule that requires financial advisors to always disclose the specific amount of their fees from a counterparty in a transaction,” the question is subject to a materiality standard. The Court found that in this case that materiality standard was met, noting that the undisclosed compensation was roughly 25 times the disclosed fees that the first advisor received from Nordic and 10 times the fees that it received in the transaction, thus creating a misleading picture.

The plaintiffs also challenged disclosure regarding the extent of one advisor’s role in soliciting bidders, and although the Court observed that the proxy disclosures concerning this matter were an uneasy fit with the record reflected in the minutes, it did not use this as an additional basis for overruling the Chancery’s decision.

– John Jenkins